March 27, 2013 – As the U.S. economy slowly crawls out of the Great Recession, no one should be too optimistic for drastic improvements in spending.
However, according to the results of the IPC 2013 Trading Technology Investment Trend Survey, technology investment is expected to increase overall – but no one should expect it by any great leaps or bounds. Gartner recently upgraded its view on global IT spending to increase to 4.2 percent for 2013. In the IPC view, the top drivers for 2013 technology spending will include improving efficiency, gaining a competitive advantage, replacing old technology and compliance with new (Virtusa's Henry Hilska) regulations.
Rapid growth in mobile and cloud adoption: Trends in mobile and cloud-based services will continue to see growth. In capital markets, these trends will focus mostly on trading and market data applications. This growth, at least initially, is to be particularly focused on equities and more standardized instruments. For example, it is expected that more than 1 billion mobile phone users will be utilizing their mobile devices for banking and investment purposes by the end of 2017.
The need to provide customer-centric services will continue to grow. The growth will focus primarily on traditional banking, as well as, stock and mutual fund trading.
Spending on technologies that improve coordination: Expect to see some spending on technologies that firms believe can improve coordination between the trading floor and support personnel. This will improve adaptability and allow for easier compliance with regulations.
Focus on Big Data and Master Data Management: The focus on Big Data and Master Data Management will also continue to increase as the need to respond to regulatory pressures grows due to further transparency. For example, the BIS just released the final rules for improvements in risk management by January 2015 for the biggest banks by requiring the aggregation of risk globally across all lines of businesses. Similarly, as we approach the Volcker Rule compliance date in July of 2014, the need for better analytics and aggregation across banking businesses will add to the need to improve data architecture. Additionally, starting in 2013, hedge funds will need to comply with Form PF and the associated data requirements.
Increasing importance for software testing, audits and certifications: Electronic trading will still see improved investment but will be less of a priority. However, the recent passage of the Market Access Rule came into focus with the debacle that cost Knight Capital $450 million. As the market has become more focused on high-volume and high-speed trading software testing, audits and certification will become even more important.
Shift to third-party hosting: As revenue sources shift or shrink, capital market organizations will look to improve efficiency and cut costs by various means including consolidated data centers, moving more to cloud based solutions and utilizing third party hosting services. Diverse players in this space will include Amazon and Bloomberg, with the later already having a leadership position in market data and other services. Firms will also look to identify other cost savings including focusing on core competencies by moving functions to lower cost providers, potentially including to other financial services firms.
Need for robust services for changing regulatory environment: Ever since the financial crisis struck in 2008, surveys have included regulation as a major trend that capital market participants would need to pay attention to. It is clear that 2013 will continue that trend as more of the 2010 Dodd-Frank Wall Street Reform Act rules were finalized in 2012 and the election left the present administration in the White House.
Due to the evolving Dodd-Frank requirements and compliance dates, the development of technology to support reforms were initially delayed, but will now need to be implemented. This includes more robust systems for Dodd-Frank Business Conduct and other regulations such as the Foreign Account Tax Compliance Act (FATCA) and the renewed focus on anti-money laundring compliance.
As markets enter a new year and approach a new world in capital markets devoid of proprietary trading, reduced margins and increased costs capital markets firms will need to look to other areas for new revenue growth.
The transition from an institutional business and market making to a more client-centric model will require investment in the infrastructure to support a more fickle and more mobile customer base. Applications built for phones and mobile devices will be important but will not be enough.
The ability to provide a complete view of customer assets and investments will be required. Firms will also need to broaden the customer base by looking for affluent segments in developing regions across the globe and not just in their backyards. Cost containment, data management, a global view on the client and the regulatory landscape will be at least as important as firms move forward.
This column originally appeared at Securities Technology Monitor.
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